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Program to Buy Bad Assets Nearly in Place, U.S. Says

WASHINGTON — The Treasury Department said on Sunday that its scaled-down program to help banks unload their troubled mortgages and mortgage securities would begin operating at full strength by the end of this month, more than a year after Congress authorized $700 billion for that purpose.

Treasury officials said that five out of the nine money-management firms it selected to buy up unwanted mortgage-backed securities had raised the minimum amount of money from private investors — $500 million each — to qualify for matching investments and loans from the federal government.

Administration officials said they expected the remaining four firms to complete their financing by the end of this month.

Three of the biggest investment firms — BlackRock, a group led by the Wellington Management Company and a group led by AllianceBernstein — closed deals for private financing totaling about $1.9 billion. Two other firms, Invesco and the TCW Group, lined up their private investors last week.

At issue is the Public-Private Investment Program, the Obama administration’s attempt to carry out what the Bush administration had originally told Congress would be the main purpose of the $700 billion rescue program for financial institutions.

The initial idea was to have the government clear out the banking system’s pipelines of bad mortgages and nearly unsellable mortgage-backed securities. The Treasury secretary under President George W. Bush, Henry M. Paulson Jr., argued that the government could revive trading in the mortgage market, restore investor confidence and let banks remove troubled assets from their books.

But Mr. Paulson reversed course almost as soon as Congress approved the plan, deciding instead to have the government inject money directly into banks by buying up special nonvoting shares of their preferred stock. The revised plan, known as the Troubled Asset Relief Program, was eventually used to prop up banks, bail out companies like the American International Group, subsidize loan modifications for troubled homeowners and rescue the automobile industry.

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The International Monetary Fund estimated last week that financial institutions worldwide still held about $2.8 trillion in troubled mortgages and securities, and that they had booked losses on less than half that amount so far. A big share of those assets is in American banks.

The Public-Private Investment Program would acquire only a tiny fraction of those assets, amounting to $12 billion. All told, the Treasury said, the five firms have thus far raised $3.07 billion in private equity. The Treasury will match that amount, dollar for dollar, with its own equity investment. It will also provide up to $6.13 billion in financing guaranteed by the government.

In effect, the money-management firms will be able to buy about $12 billion in troubled assets. The firms will split any profits evenly with the Treasury, but taxpayers would ultimately be on the hook if the investments lost money.

The program has been hindered by several obstacles. It took government officials months to come up with a plan that they thought would take the greatest advantage of the government’s investment. Investment firms, meanwhile, were worried they might irk Congress, potentially subjecting them to tight restrictions on executive compensation.

Also, banks, the institutions that are expected to do most of the selling of troubled assets, have been reluctant to do so at the bargain-basement prices that investors have been demanding.

But Treasury officials said the program could have important effects on the capital markets, even if it is comparatively small, because it will help establish market prices and restart trading in what had been unsellable assets.

A version of this article appears in print on October 5, 2009, on Page B3 of the New York edition with the headline: Program to Buy Bad Assets Nearly in Place, U.S. Says. Order Reprints|Today's Paper|Subscribe